Former Connecticut Treasurer and IPFI President, Christopher Burnham, discusses the current state of the pension system with other experts, focusing on the increased use of ESG investment.

Washington, DC – The Institute for Pension Fund Integrity (IPFI) released its latest research on Tuesday, September 25, 2018. In the wake of the Trump Administration’s renewed guidance on environment, social, and governance (ESG) investing in the April 2018 Department of Labor Field Bulletin, IPFI felt it important to analyze the impact of ESG investing on public pensions. While the DOL guidance applies to private sector pensions, ESG investing is growing in popularity in both the private and public sectors, and it is important to understand the role it plays for public pensions.

Public pensions across the country face more than $6 trillion dollars in unfunded liabilities. Therefore, while some investing strategies are seen as more popular than others, it’s important for public pensions to focus on the returns gained to begin closing the gap. In the latest research by IPFI, the organization details how ESG investing differs in the public sector versus in the private sector. ESG has shown to add value to private investments, but in the public sector it ultimately comes down to the question of if ESG investments add financial value. Much of the research is still undecided on the impact of ESG investing on public pensions given the propensity for ESG investments to be made based on political, not financial, decisions. In the public sector, investment decisions should never be made based on the political impact of an investment.

Christopher Burnham, President of IPFI, recently discussed this new research at a panel discussion hosted by the Pepperdine University School of Public Policy. He joined other pensions experts to discuss this and other challenges facing pensions. Other participants included:

At the panel, Mr. Burnham said, “ESG investing is valuable when it adds bottom-line performance to a pension. But it’s not the role of our public pension fiduciaries to make decisions based on what they think is good for society. Instead, they must make investment decisions based on one factor, and one factor only: does it add alpha?” This thinking supports IPFI’s other efforts given its goal to keep politics out of the management of public pension funds.

This research and discussion comes as we reflect on the 10 years since the Great Recession. Considering that public pensions were almost 90% funded before the Recession and on average are now 68% funded, the impact of all investment decisions, whether ESG or otherwise, will be felt by retirees for decades to come.

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The Institute for Pension Fund Integrity seeks to ensure that local, state and federal leaders are held responsible for their choices in investment, led not by political ideation and opinion but instead by fiduciary responsibility. IPFI is a non-partisan, non-profit organization based out of Arlington, Virginia, and spearheaded by former Connecticut State Treasurer Christopher B. Burnham.

FOR IMMEDIATE RELEASE

November 16, 2018

Press Release: IPFI Reacts to the Proxy Voting Roundtable

IPFI continues to call for the registration of proxy advisory firms with the SEC to ensure greater transparency.

Washington, DC – The Institute for Pension Fund Integrity (IPFI) attended yesterday’s roundtable hosted by the U.S. Securities and Exchange Commission (SEC). While reform is needed across the proxy voting process, IPFI’s primary attention was on the third panel, “Proxy Advisory Firms: The Current and Future Landscape.” Proxy advisory firms play an important role in advising institutional investors, including pension funds, on shareholder proposals. However, there is a demonstrated need for greater transparency in this process.

As IPFI outlines in our public comments to the SEC, the current proxy advisory system negatively impacts public pensions for two primary reasons:

Public pensions are large institutional investors, meaning that they serve as a powerful voice in corporate decision-making through their position as proxies for shareholders (retirees)

There has been a demonstrated increase in the politicization of shareholder votes, including by public pension fund managers defying their fiduciary responsibility.

The advisory system as it currently stands is open to conflicts of interests, as was much discussed during the panel. IPFI is calling on the SEC to require proxy advisors to adhere to their fiduciary responsibility and to register with the SEC, so that retirees can have a more transparent understanding of the proposals their fund managers are voting on. This will help reduce the politicization of shareholder proposals, which range the gamut from divestment, to corporate governance, to payscale proposals.

Reforming the proxy voting process would put more power into the hands of the actual pensioners, increase transparency, and help ensure that proxy advisors and pension fund managers fulfill their true fiduciary responsibility—the highest return at a reasonable risk.

Christopher Burnham, IPFI President and former Connecticut State Treasurer commented on today’s roundtable saying, “I think some of the most important words said at the panel were that we have to make sure that fiduciaries focus on enhancing shareholder value. That is the very essence of fiduciary duty.” He continued, “I agree that there should be no safe harbor from fiduciary duties, and that fiduciaries at all levels have the same level of responsibility to the beneficiary as the day to day money manager. We also need to have the fullest and most unfettered transparency because it is essential to that duty.”

The roundtable that the SEC hosted today is an important first step in illuminating the proxy voting process. Furthermore, it’s a necessary step towards ensuring that the shareholder proposals that are put forth are in the best interest of the actual shareholders – in many cases, retirees who have dedicated their lives to supporting state and local governments.

FOR IMMEDIATE RELEASE
November 12, 2018

Ahead of the SEC roundtable this week, the Institute for Pension Fund Integrity releases a white paper on the need for greater transparency in the proxy voting process to better serve public pension retirees and taxpayers

Arlington, VA (November 12, 2018) The Institute for Pension Fund Integrity (IPFI) has submitted public commentary on the need for greater transparency and accountability in the proxy voting process, as the U.S. Securities and Exchange Commission (SEC) hosts a roundtable to discuss the proxy voting process this week. The added transparency is a critical need for public pension retirees who rely on pension fund managers to make the right decisions in these votes – and not to use them for political purposes.

The SEC is seeking possible reforms to the proxy voting process in part because of the tremendous market power that large, institutional investors, including public pension funds, hold. The current structure cuts individual and passive investors out of the process. Additionally, another large problem is that two firms control 97% of the proxy advisory market, which these large institutional investors use to help guide decisions on shareholder proposals. This leaves the door wide open for conflicts of interest.

With proper proxy voting reform, policy makers can restore balance to the shareholder voting process, increase overall transparency, and ensure that the individual investor’s voice is not overshadowed by the potentially-misguided political motivations of fund managers and other institutional forces.

IPFI calls on the SEC to implement new policies so that proxy advisors are required to adhere to their fiduciary responsibility with counsel and register with the SEC, disclosing possible conflicts. Likewise, increased accountability, including the ability for companies to identify and mediate clear inaccuracies prior to institutional investors review, should be requisite.

Reforming the proxy voting process would put more power into the hands of the actual pensioners, increase transparency, and help ensure that pension fund managers fulfill their true fiduciary responsibility—the highest return at a reasonable risk.

Christopher Burnham, IPFI President and former Connecticut State Treasurer explained, “As the true owners of large pension funds, pensioners deserve complete transparency to know the details of the shareholder proposals and to have their voices heard as the ultimate shareholders in many of these large companies.”

If the SEC reforms the proxy voting process to add greater transparency and accountability, it would be an important step to keeping politics out of the management of public pensions.

The Institute for Pension Fund Integrity seeks to ensure that local, state and federal leaders are held responsible for their choices in investment, led not by political ideation and opinion but instead by fiduciary responsibility. IPFI is a non-partisan, non-profit organization based out of Arlington, Virginia, and spearheaded by former Connecticut State Treasurer Christopher B. Burnham.

For decades, proxy voting has been a pillar of capital markets, ensuring that shareholders have their voice heard through elected representatives. However, this process is under threat as shareholder influence has been consolidated by institutional investors and other organizations that now own between 70% and 85% of the ten largest American companies. Wielding tremendous market power, these large investors are often the most powerful voice at shareholder meetings and can influence corporate decision-making at a level unavailable to the individual and passive investor. Moreover, these large investors often have political motivations that conflict with their duty as fiduciaries.

The trend toward implementing ESG — environment, social and governance — has hit critical mass, and most investment organizations are at various stages of either installing or preparing these policies. But could the hype get in the way of an organization’s mission?

That is a question that is on the minds of many people with a fiduciary duty to constituents.

Institutional investors such as pensions, endowments and sovereign wealth funds serve the financial needs of particular interests — pensioners, college students, a country’s citizens, for example. And the investment staff are duty-bound to make investments that further that mission.

But investment staff can get caught between differing views on how ESG should be used.

As featured on Fox & Hounds Daily website, an article by Christopher Burnham, a former Connecticut pension fiduciary and founder and president of the Institute for Pension Fund Integrity, noted that California Public Employees’ Retirement System board member Priya Mathur was recently voted out due to ESG issues.

Mathur was replaced by police officer Jason Perez, who stated during his campaign for the CalPERS board that ESG considerations are costing the pension returns. “This example [of certain investments] clearly shows how CalPERS is being used as a political action committee as opposed to a retirement fund.”

Burnham continues that ESG is, of course, important, and good governance is a critical part of investing, “However, a fiduciary has one mission and one mission only, and that is to manage the funds to which they have been entrusted with the highest return at a reasonable risk.”

Balancing fiduciary needs with ESG goals is the challenge for institutional investors, and there are reports that find the two are actually compatible — that ESG policy can lead to higher returns. But not in all cases.

In its September report, ESG investing for public pensions: Does it add financial value, the Institute for Pension Fund Integrity reports that while the research on whether ESG policy can add financial value to portfolios is not fully developed, there are studies that have found they can.

A funny thing happened recently in the left-leaning Golden State. In a board election last month, members of the California Public Employees’ Retirement System, or Calpers, the biggest pension fund in the nation, threw out their president and gave ESG investing a bloody nose.

ESG is the increasingly popular asset-management style that applies environmental, social, and governance standards to screen potential investments. Following this approach, an investor might avoid certain stocks or push shareholder proposals to modify corporate behavior. Unfortunately, they often favor hard-to-define social objectives rather than the narrower goal of maximizing shareholder returns.

Perez, who received 57% of the vote to Mathur’s 43%, ran a campaign that criticized her support for Calpers’ use of ESG, which goes back to at least 2012. Perez’s victory didn’t come as a surprise to those who bothered to look at Calpers’ mediocre recent returns. And that’s exactly what members seemed to have done…..

“We are reaching a crescendo of bad fund management meeting unfunded liabilities,” says Christopher Burnham, president of the Institute for Pension Fund Integrity. “Calpers members recognize this and reject those who are playing politics instead of getting the highest rate of return at a reasonable risk.”

Recently California Public Employees’ Retirement System (CalPERS) – whose former board president, Priya Mathur, was discarded as a board member by a landslide vote of 57% to 43% – signed a letter asking the Securities and Exchange Commission (SEC) to develop metrics for requiring listed companies to report on their compliance with environmental, social, and governance (ESG) standards that presumably would be set by the SEC.

What a stick in the eye of the more than one-million beneficiaries of the almost $400 billion pension system, as she unceremoniously departs, after leading an organization that left billions of dollars in out-performance on the table due to pervious political investing.

The role and responsibility of a fiduciary is not to invest with a personal political agenda, nor is it to impose their personal vision on what types of companies to invest in or not, including tobacco, alcohol, gambling, energy, private prisons, and others. For almost 1000 years, fiduciary duty has meant one thing: investing other people’s money for their (retirement) benefit and security.

The trouble we run into during campaign season is candidates making emotional promises that yield harmful policy. One of the state Treasurer candidates has essentially promised to use state investments as a political tool. This misguided approach is harmful to Ohio’s financial future.

Democratic state Treasurer nominee Rob Richardson said (”Attorney pushes investing changes; Richardson outlines goals,” Oct. 14) he plans to divest state investments in private prison companies to make a statement, even though these companies have proven profitable investments for our state.

Promising divestment from private prison stocks is pandering for votes, and won’t impact how such companies operate or that they exist. The state treasurer must understand that a robust pension fund is the goal and these stocks have delivered. The Public Employees Retirement System of Ohio invests in both of the nation’s two largest prison contractors, the GEO Group and CoreCivic. As of June, 2018, the GEO Group stock owned by the Public Employees system was valued at over $2.5 million, with the investment in CoreCivic stock valued at over $5.5 million. The State Teachers Retirement System of Ohio also owns stock in both companies, to the tune of $5.7 million and nearly $4.9 million, respectively. Both of these companies have seen astronomical growth in share prices since 2016.

Arlington, VA (October 16, 2018) Today, the Institute for Pension Fund Integrity (IPFI) is proud to announce a new tool that reveals the true cost of the unfunded liabilities of the U.S. public pension crisis. After years of unrealistic and overly positive assumptions by plan actuaries and outdated mortality rates, public pensions now face a multi-trillion-dollar underfunding. In order to raise awareness of the seriousness of this issue, IPFI has designed a calculator that gives transparency to unfunded liabilities as you adjust assumed rates of return and the mortality rates of pensioners.

The politicization of public pensions has been consistently growing over the last decades. Between increased movements to allow for the politically-motivated divestment of funds, despite their performance, and plans using unrealistic assumptions that lead to more politically advantageous outcomes, our public pensions are staring down the barrel of more than $6 trillion in debt. What’s worse, is that the debt could be even worse than that if more realistic assumptions are used.

The revolutionary calculator created by IPFI aggregates the data from each state’s Comprehensive Annual Financial Report to display never-before compiled information that allows taxpayers, pensioners, and policymakers to see the impact of changing the core assumptions, even by just 1%.

The IPFI Pension Gap Calculator shows the following:

When a user moves the mortality rate calculator, the reduction is applied across the board at every age level and is then used to estimate the additional rise in liabilities. As retirees live longer, the amount of benefits owed to them increases, causing liabilities to rise.

What does the unfunded liability look like if the assumed rate of return is lowered? This is where the calculator comes in with the ability to adjust the rate of return from 2% up to 15%. As you lower the assumed rate of return, you will increase the level of unfunded liabilities. Users can watch as the bar graph skyrockets as the module moves closer and closer to 2%.

“The politicization of our public pensions must stop,” said IPFI President Christopher Burnham recently. He continued saying, “Without realistic return and mortality rate calculations, the retirement crisis our nation faces will only grow larger. This calculator allows plan beneficiaries and taxpayers to see the effects of these miscalculations on their own retirement systems in real time.”

IPFI will continue bringing transparency and accountability to the state of our nation’s public pensions, with additional data being added in coming months.

The Pension Gap Calculator is available at ipfiusa.org, along with a collection of other white papers and resources that show the true state of public pensions in the United States.

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The Institute for Pension Fund Integrity seeks to ensure that local, state and federal leaders are held responsible for their choices in investment, led not by political ideation and opinion but instead by fiduciary responsibility. IPFI is a non-partisan, non-profit organization based out of Arlington, Virginia, and spearheaded by former Connecticut State Treasurer Christopher B. Burnham.

Are environmental, social and governance (ESG) criteria generating alpha? Not always, says the US Institute for Pension Fund Integrity (IPFI) according to which the institutional manager California Public Employees’ Retirement System (CalPERS) would have lost more than US $ 3 billion in potential returns following its withdrawal from the sector. tobacco in the year 2000.

IPFI considers that the institutional investor’s decision to leave difficult sectors such as tobacco and hydrocarbons is above all of a political nature. In doing so, pension funds would fail in their “fiduciary duty” vis-à-vis their contributors.

“Although CalPERS staff encouraged the board of directors to end its divestment strategy, in 2016 the board voted to renew this ESG investment orientation for political reasons,” says IPFI.

IPFI was created by Christopher Burnham, former vice-president of PIMCO, former state secretary for the state of Connecticut and former deputy secretary-general for management of the United Nations. He is currently head of Cambridge Global Capital, an investment firm in Virginia.

The basic mission

Jacques Lussier is President and Chief Investment Officer of Ipsol Capital, an investment firm for individual and institutional investors.

He explains that there are two approaches to sectors that generate moral or ethical questions: the exclusion or the limitation of the investments reserved for the “best of class” so as to reinforce their weight and to reward their good practices .

In principle, some sectors such as hydrocarbons lend themselves to selective investments in firms with best practices. “With the tobacco companies, it’s almost impossible. This sector is very concentrated and the product is pretty much the same from one company to another, “says Jacques Lussier.

Should pension plans, for ethical or moral reasons, leave this kind of sector where there are no better class?

“The question arises in the case of organizations dedicated to the health and well-being of the population, such as pension funds of hospitals or pharmacy chains,” says the co-author of the book Rational Investing: The Subtleties of Asset Management (New York, Columbia Business School Publishing, 2017).

“We must see if the investments are in agreement or in contradiction with the basic mission of pension funds,” says Jacques Lussier.

Where to invest?

Former economist at the International Monetary Fund and co-founder of the Sustainable Market Strategies research firm, François Boutin-Dufresne considers the question from another angle.

“What did CalPERS do with the money it took out of the tobacco industry? Has it invested in more efficient sectors or companies like PayPal, for example? Studies like IPFI do not say it, “he says.

On the other hand, boards of directors must also consider reputational and regulatory risks.

“Institutional investors have a reputation to defend. At the limit, there is sometimes a price to pay! These investors are also trying to predict the future actions of governments to adapt to them. At one point, the outright ban on tobacco was being considered in some influential circles in California. It had to be taken into account, “says François Boutin-Dufresne.

IPFI Applauds Corona Police Sgt. Jason Perez on His Election to the CalPERS Board of Administration

The California Public Employee Retirement System (CalPERS) held board elections last week with Priya Mathur, who also serves as board president, losing to Jason Perez, a sergeant of the Corona Police Department in southern California. Perez campaigned on the premise of prudent pension fund management and responsible investment and was subsequently chosen to represent active public agency members on the CalPERS Board of Administration. IPFI would like to applaud our nation’s largest pension system for electing an official who prioritizes prudent investment strategies over politics. In his campaign, Perez championed the ideas of sound investing and professionalism in management and keeping the political whims of board members away from the livelihood of pensioners.

Throughout his campaign, Perez referenced responsible ESG investing in his platform, stating that the investment strategy should only be employed when investments add to the plan’s fiscal health. This same stance was outlined in our recent IPFI white paper, “ESG Investing for Public Pensions: Does it Add Financial Value?” Like Jason Perez and his campaign, IPFI advocates for ESG when investments prove to be profitable for the pension plan while denouncing ESG investments when pursued for a political agenda.

The Institute for Pension Fund Integrity seeks to bring transparency and accountability to the public pension system. With elected officials like Jason Perez in California, public servants are one step closer to a secure retirement and addressing the more than trillion-dollar unfunded pension liabilities across the United States. At IPFI, we would like to say congratulations to Jason Perez and we hope that he continues to advocate for the prudent management of public pension plans across the state of California.

The Institute for Pension Fund Integrity seeks to ensure that local, state and federal leaders are held responsible for their choices in investment, led not by political ideation and opinion but instead by fiduciary responsibility. IPFI is a non-partisan, non-profit organization based out of Arlington, Virginia, and spearheaded by former Connecticut State Treasurer Christopher B. Burnham.

The trend toward implementing ESG — environment, social and governance — has hit critical mass, and most investment organizations are at various stages of either installing or preparing these policies. But could the hype get in the way of an organization’s mission? That is a question that is on the minds of many people with a fiduciary […]

A funny thing happened recently in the left-leaning Golden State. In a board election last month, members of the California Public Employees’ Retirement System, or Calpers, the biggest pension fund in the nation, threw out their president and gave ESG investing a bloody nose. ESG is the increasingly popular asset-management style that applies environmental, social, and […]

Recently California Public Employees’ Retirement System (CalPERS) – whose former board president, Priya Mathur, was discarded as a board member by a landslide vote of 57% to 43% – signed a letter asking the Securities and Exchange Commission (SEC) to develop metrics for requiring listed companies to report on their compliance with environmental, social, and […]